Apple, Google and Boards of Directors: What are 'Interlocking Directorates'?

By Caleb Groos on May 5, 2009 11:16 AM

The Federal Trade Commission (FTC) is probing Google and Apple regarding their respective boards of directors. In particular, the FTC is examining shared members of the two boards. Though rarely invoked, US antitrust laws forbid "interlocking directorates" - the sharing of officers and/or directors between competing corporations.

As reported by Reuters, the FTC is concerned about Google CEO Eric Schmidt and Arthur Levinson, the former chief executive of Genentech Inc. They both sit on the boards of both Google and Apple. Why would this be a problem? The FTC is concerned that the seldom enforced Section 8 of the Clayton Act, banning "interlocking directorates" in competing corporations, may apply to Apple and Google.

The rule is intended to prevent anti-competitive coordination between corporations. Additionally, all directors owe a duty of care and fiduciary duties to the companies on whose boards they sit. Sitting on the boards of competing companies (or serving as an officer) would open the door to conflicting fiduciary duties.

Of course, the focus of the FTC inquiry into Google and Apple will be the degree to which they compete.

The interlocking directorate rule applies to corporations that compete on what constitutes at least 2% of each company's total sales and at least 4% of one company's sales. It applies only if both companies are beyond a certain size and the overlapping sales hit a dollar threshold for at least one company. These amounts change annually, and currently are $26.161 million in aggregate capital, surplus, and undivided profits for each corporation and $2,616,100 in overlapping sales for at lease one corporation.

ZDNet points out that competition could spring up relating to Apple's iPhone and Google's Android, a software platform for mobile devices. Other products, such as netbooks, could also be put the two into competition. However, it remains to be seen whether any area in which Google and Apple compete represents more than 2% of Google's sales.

If the FTC does find a violation of the interlocking directorate rule, corporations can remedy it by having the board member(s) in question resign.